Indonesia Looks East in Infrastructure Catch-Up: Southeast Asia

Indonesia’s government will emphasize building infrastructure projects on its eastern islands in 2013 as it seeks to spread development across the archipelagic nation to boost economic growth.

“The government must balance infrastructure improvement in areas that haven’t been developed with those that have,” Deputy Public Works Minister Achmad Hermanto Dardak said in an interview yesterday. “We will finish roads in Sumatra, Kalimantan and Sulawesi to connect the provinces on those islands, and we will build roads in Papua.”

Indonesia must shift the share of total spending from subsidies into social programs and infrastructure to sustain growth, attract investment and reduce poverty, according to the World Bank. Faster economic growth is stretching the capacity of roads and ports as goods flow through the world’s largest archipelago, which covers 5,300 kilometers (3,300 miles) across more than 17,000 islands along the equator.

Infrastructure spending has fallen to about 4 percent of gross domestic product from more than 8 percent in 1995 and 1996, the World Bank says. The government plans to invest about 3,000 trillion rupiah ($309 billion) by the end of 2014 on infrastructure, manufacturing facilities and projects such as dams as part of its 2011-2025 development plan, Coordinating Minister for the Economy Hatta Rajasa said at yesterday’s seminar.

Spending Focus

“Indonesia’s quality of spending can be improved,” Ndiame Diop, Indonesia lead economist at the World Bank, said in Jakarta yesterday during a presentation of the bank’s quarterly economic report. “We have seen a strong increase in capital spending, which is very positive, but subsidy spending is still very high. As you know, one of the weaknesses in the fiscal policy in Indonesia is the quality and efficiency of spending.”

Complex budget revisions, administrative delays and lengthy land acquisition processes have hampered Indonesia’s ability to implement budget plans, the World Bank says, underscoring President Susilo Bambang Yudhoyono’s challenge as he seeks to sustain one of Asia’s fastest growth rates. The nation’s economy, Southeast Asia’s biggest, expanded 6.17 percent in the third quarter from a year earlier, holding above 6 percent for an eighth quarter.

The Ministry of Public Works, among the biggest state spenders, had only disbursed about 77 percent of its 75 trillion-rupiah 2012 budget as of Dec. 13. It expects to reach as much as 92 percent by the end of the year.

Budget Delays

Delays during budget preparations and slow clearance of land are among the reasons infrastructure spending has been slow, according to a May joint report by the Ministry of Finance and institutions including the World Bank.

The government has revised spending rules to speed up the disbursement process, Vice Finance Minister Anny Ratnawati said last month. The new rules allow ministries to hold tenders in November for projects to be implemented in the following year, she said. Starting next year provinces, regencies and ministries must also prepare disbursement of their budgets every month.
“We will monitor this closely,” Ratnawati said. “To anticipate a slowdown in China and impact of the commodity slowdown in our state budget, improvement in the quality of spending becomes important.”

More Ports

Indonesia’s parliament approved in December 2011 a land acquisition bill to speed up the process for infrastructure projects.

Yudhoyono also plans to build more ports, to help achieve growth of as much 9 percent a year, as in China. The pace of expansion in the world’s fourth-most populous nation has averaged about 5.6 percent in the past decade, less than China’s 10.6 percent.

Six of the world’s 10 busiest ports in 2011 were in China, according to the World Shipping Council. Indonesia’s only entry in the top 50 was Tanjung Priok near Jakarta, ranked 24th. State-owned Indonesia Port Corporation II has started work on a harbor in Kalibaru near Tanjung Priok to ease bottlenecks.

State-owned enterprises have committed about 900 trillion through 2014 for infrastructure and real-sector projects, Economy Minister Rajasa said yesterday.

“State-owned enterprises will build ports, airports, roads and toll roads, while the government’s budget will finance basic infrastructure such as access to fresh water in villages,’ he said. “This will improve life quality.”

Indonesia also faces the prospect of joining a single Asean economic community with the Association of Southeast Asian Nations at the end of 2015, in which Asean will be in a single market and become production-based, Rajasa said.

“The question is if Indonesia will become production-based or only market-based for investors,” he said. “We don’t want Indonesia to become market-based; that’s why we need to hurry to improve our infrastructure.”-Bloomberg (December 19, 2012 1:00AM GMT+0800)